Amazon: Two Steps Forward And One Step Back

Summary

Weak profit is a function of higher logistics capex, which I believe will remain elevated in the near term.

Continue to like the story and growth outlook, but would be more constructive at the $550 level.

Amazon's (NASDAQ:AMZN) Q4 caught the market by surprise given the structural migration towards e-commerce and the robust holiday sales figures that we saw late last year. However, worth noting is that much of the revenue miss was driven by the weakness in international sales while the bottom-line miss was driven by higher-than-expected investment in fulfilment and logistics. Ultimately, investors have to ask themselves "is AMZN heading into another investment cycle that may continue to cap the company's profit?" The answer I got after the quarterly call is "yes," and that profit-oriented investors will continue to be disappointed as the company scales up its logistics platform. That said, AMZN remains a revenue story in the foreseeable future. With the stock down -11% after the results, I believe the correction is reasonable given that it more than doubled in 2015. For growth investors, I would still be a buyer of the stock as long as revenue growth remains intact; the Amazon Prime ecosystem continues to expand, and AWS is taking more shares from local datacenter/cloud providers.

Revenue of $35.75b, +22% y/y, was in line with consensus, but EPS of $1.00 missed by a whopping $0.56. Guidance of $26.5b-29b (+17-28% y/y) was largely in line with the $27.65b consensus. North America remains AMZN's key market with +24% y/y growth and accounts for 60% of total revenue. As I have said in my previous notes, the Amazon Prime ecosystem has been gaining traction across the region given its value proposition in both e-commerce and online video. However, the growing demand for Amazon Prime has put logistics pressure on the company which is considering building its own logistics fleet of trucks and airplanes given the inadequacy of its logistics partners. That said, lower profit margin due to higher logistics cost from the growing demand for its Prime ecosystem is a problem that I can live by.

On the other hand, international revenue growth of +12% (+22% exc. FX) is slightly disappointing and could be a function of logistics and lack of Prime penetration. Additionally, I believe that AMZN may also be facing early signs of competition in the overseas market from local e-commerce providers in the region given that the local platforms may have better merchant relationship and logistics network than Amazon. This is a demand issue that the company needs to address and could potentially impact its revenue growth profile in the coming years.

Heading forward, profit-oriented investors should exit the stock because it appears that AMZN is once again becoming a revenue growth story. In my view, Prime and FBA will continue to drive AMZN's near-term revenue profile, and this will require additional spending on logistics, which will further pressure profit growth. As long as AMZN's North America revenue is strong, I believe it is a good indicator that the company may see similar success once it rolls out Prime across its overseas market. AMZN will turn a profit eventually, but given the low e-commerce penetration around the world with China at 10% of total retail spending, US at 8% and Europe at 5-7%, there is still a lot of runway for the structural rise in e-commerce, so a sustainable profit may not materialize this decade.

As for the overseas growth, it may be too early to conclude whether local competition may have impacted AMZN's growth profile, but worth noting is that Otto Group and Tesco (NASDAQ:TESO) are both ramping up their e-commerce platforms in Europe, Alibaba (NYSE:BABA) and JD.com (NASDAQ:JD) have been scaling up their cross-border e-commerce capabilities in Asia, and MercadoLibre (NASDAQ:MELI) has been making steady gains in Latin America. In the near term, AMZN will continue to dominate Europe and North America e-commerce, but long-term growth will depend on how quickly it can ramp up Prime and global logistics.

Conclusion - I remain bullish on AMZN and continue to like how it is positioned for the e-commerce trend. However, I would be more constructive on the stock at the $550 level as I suspect additional profit-oriented investors may wind down their AMZN positions in the next week or so.

Disclosure:I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.